January 4, 2007

Chapter 13 BK Mortgage Reporting

In a previous article we discussed credit repair for a bankruptcy that had been discharged.  You can read about that at Bankruptcy Credit Repair.  It’s fairly cut and dry; the bankruptcy has been discharged and the bankruptcy credit repair steps will undoubtedly lead you on the path to a higher FICO score.  Now we’re going to enter the murky waters of a bankruptcy that has yet to be discharged.  As you will see, it’s a roily topic indeed – one that has puzzled even the President and CEO of the Mortgage Bankers Association.  Specifically, the question is how should a creditor report a tradeline on the credit report of an individual who is making payments under a Chapter 13 Bankruptcy?  

First and foremost, we should look for guidance from the Fair Credit Reporting Act.  Surprisingly, there is only one reference to Bankruptcy in the FCRA.  Section 605(a)(1) of the FCRA states that the following information is excluded from a credit report:

“Cases under title 11 [United States Code] or under the Bankruptcy Act that, from the date of entry of the order for relief or the date of adjudication, as the case may be, antedate the report by more than 10 years”.

This FCRA excerpt makes no distinction between a Chapter 7 or Chapter 13 bankruptcy.  Our readers should know that per the FCRA, a Chapter 13 Bankruptcy can remain on a credit report for ten years.  At the risk of getting off subject, I think it important to commend the CRA’s for voluntarily deleting a Chapter 13 after seven years from filing date.  Experian’s website (experian.com/ask_max/deleting_information.html) states:

“Bankruptcy: Chapters 7, 11, and 12 remain for 10 years from the filing date. Chapter 13 remains seven years from the filing date. Accounts included in bankruptcy will remain seven years from the date they were reported as included in the bankruptcy”

This still doesn’t answer our question of how a tradeline should report on the credit report of an individual who is making payments under a Chapter 13 Bankruptcy?  As previously noted, this has perplexed even the Mortgage Bankers Association, who on Page 7 of their May 22, 2006 letter to the FTC (ftc.gov/os/comments/FACTA-furnishers/522110-00104.htm) and other Government Agencies, petition to “clarify how these situations should be reported”.  Even more interesting is the comment on Page 6 which states “Servicers are often advised by counsel not to report account activity if the borrower has filed for bankruptcy”.  This is quite a statement and one that can have profound implications on credit scoring.  Take for example, a debtor who has filed for Chapter 13 Bankruptcy and has diligently been making payments on time to the trustee for twelve months.  The trustee in turn pays the creditors an amount that has been agreed upon by the court.  This amount will most likely be less than the original contractual amount required prior to the bankruptcy filing.  Is it right for the creditor to report the tradeline as more and more delinquent each month even though payments are being made on time to the trustee?  If the bankruptcy filing is evidenced on a credit report (clearly it is), then shouldn’t the bankruptcy payment plan be just as readily discerned and in turn appropriately factored in to that borrower’s credit score?  A compromise seems to be in order with the previous comment “Servicers are often advised by counsel not to report account activity if the borrower has filed for bankruptcy”.  But what can be said to those creditors who surreptitiously continue to report a tradeline as more and more delinquent despite a debtor’s on-time payments to the trustee?  I can attest from my own experience in reviewing thousands of credit reports, that this unfortunate phenomenon is all too common.  Furthermore, empirical evidence suggests that this type of ill reporting drags FICO scores down to undeserved levels.  And as if we needed to add any more gravity to the subject, the BCB has published a previous article on a mortgage program called the Bankruptcy Buyout.  A Bankruptcy Buyout can be a lifesaver to a debtor in the middle of a Chapter 13 and his credit score is of critical importance for underwriting approval.

Fortunately, we have one other source of information to quote, and for those of you who have been following the BCB, the source should be no surprise.  Yes, the answer is hidden in 6-13 of the Credit Reporting Resource Guide (a/k/a the Metro 2 Manual), where we read “For accounts where all associated borrowers are reported with a Bankruptcy Consumer Information Indicator, report the Account Status Code that represents the status of the account just prior to notification of the bankruptcy”.  This is later contrasted to a borrower who has not filed bankruptcy with these comments “Continue to report the Account Status, Current Balance and all applicable fields for the account for the borrower who did not file bankruptcy”.  The Metro 2 Manual has spoken.  The bigger question is whether or not furnishers will listen; but we’ll save that as a topic for a future article.

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